USDA Home Loans : 100% Financing And Very Low Mortgage Rates

Dan Green

The Mortgage Reports Contributor

USDA Home Loans

USDA home loans are loans backed the U.S. Department of Agriculture as part of the USDA Rural Development Guaranteed Housing Loan program, which is also known as Section 502. USDA loans are available to home buyers with below-average credit scores or better and provide the option for no-money-down. Furthermore, USDA home loans offer reduced mortgage insurance premiums for borrowers and below-market mortgage rates.

100% Financing For Non-City Dwellers

For home buyers today, there are two mortgage programs which offer 100% financing. The first is the VA loan from the Department of Veterans Affairs. It's available to most active military personnel and veterans nationwide.

The other program is the U.S. Department of Agriculture's Rural Development Single Family Housing Loan Guarantee Program.

Sometimes called a "Rural Housing Loan" or a "Section 502" loan, today's USDA financing isn't just for farms. Because of the way the USDA defines "rural", there are plenty of exurban and suburban neighborhoods nationwide in which USDA loans can be used.

Home buyers who buy a home in a qualified USDA area, and who meet USDA income eligibility requirements, can take advantage of the USDA's low mortgage rates and a program which required no downpayment whatsoever.

What Are The Benefits Of A USDA Home Loan?

USDA mortgages are structured just like conventional ones via Fannie Mae and Freddie Mac. Where they differ, though, is with respect to downpayment requirements and mortgage insurance.

Unlike conventional loans, USDA mortgages have no down payment requirement, which allows a home buyer to finance a home for 100 percent of its purchase price. The U.S. Department of Agriculture will assess a two percent mortgage insurance fee to all loans, and the cost may be added to the loan size at the time of closing, as can the costs of eligible home repairs and improvements.

You can't do that with a Fannie Mae or Freddie Mac loan.

Another "RD Loan" advantage is that its annual mortgage insurance fee is just 0.35% annually (decreased from 0.50% in October 2016), no matter how large or small of a downpayment.

This is less than half of the private mortgage insurance charged via a comparable conventional loan, and also a large savings on what FHA will charge.

The USDA upfront fee also beats that of FHA. The fee is currently 1.0% of the loan amount (decreased from 2.75% in October 2016), compared to FHA's 1.75% upfront fee.

Furthermore, because USDA home loans do not have a specific loan size limitation, home buyers can theoretically borrow more money with a USDA mortgage than via conventional, VA or FHA routes.

Loans insured by the U.S. Department of Agriculture are available as 30-year fixed rate mortgages only, and come with their own USDA Streamline Refinance program.

How Do I Qualify For A USDA Home Loan?

Similar to FHA home loans, rural housing loans aren't made by the USDA. Rather, the USDA insures mortgage lenders making USDA Section 502 loans against loss. The program is meant to spur homeownership in rural and underdeveloped areas.

In order to qualify for a USDA loan, home buyers must meet two requirements.

First, the buyer must buy a home in a USDA-eligible area. In general, USDA property eligibility is governed by census tract density. However, the term "rural" leaves room for interpretation, opening Section 502 mortgages to buyers in unexpected parts of the country.

For example, huge swaths of California are USDA Rural Loan-eligible, as is most of the Midwest. Even New Jersey is stuffed with USDA-eligible homes.

A buyer's second USDA eligibility requirement is that household income may not exceed 115% of the area's median income. A mortgage lender can tell you whether your income meets program requirements, if you're unsure how to check.

There are other USDA qualifying criteria, too, including :

The subject property must be a primary residence

The buyer must be at least two years seasoned from a bankruptcy discharge

The buyer must have decent credit

The buyer must meet a qualifying ratio of 29 percent for housing costs; and 41 percent for total debt

The buyer may not own another home within commuting distance of the subject property

However, it's important to note that these guidelines are not steadfast -- specifically, with respect to credit scoring and debt-to-income ratios. The credit score minimum is typically 640, although USDA guidelines leave wiggle room for lower-credit borrowers. Buyers are evaluating on the overall strength of their loan application.

This is also why the 29/41 debt ratios can be waived. A buyer which can show a strong credit score, for example, or deep reserves can generally get approved with debt ratios in excess of the recommended limits.

For How Much Can I Get Approved With USDA?

For today's home buyers, current mortgage rates are low and they're especially low with the USDA program. The USDA loan is designed for low rates and leniency so long as the buyers meets the USDA's property and income eligibility requirements.

Get today's live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.

Dan Green is an expert on topics of money. He has been featured in The Washington Post, MarketWatch, Bloomberg, and others.

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